Boardroom Chatter: Cost Reduction (Part 3 - Contract Management)

Charlotte Sutton
Charlotte Sutton,
Over lunch, the CEO, CFO & CPO of a large corporation were having a discussion about how to reduce costs.
CEO (to the CPO): “You said the other day that we could further reduce costs with better contract management - what do you figure we could save?”

The CPO outlines the current position and targeted savings they are working towards:
  • $1.7M savings by increasing on-contract buying from 65% to 85% (20 percentage points) by making them fully visible to all buyers at purchase time 
  • $400,000 savings by using improved contract visibility to consolidate duplicate contracts and gain higher volume discounts 
  • $200,000 savings by preventing incorrect prices on POs (e.g. failure to use quantity price breaks)
That’s over $2.3M in annual savings. 
CFO: “Based on a review of current contract activity we've done together, we’ve identified additional ways we can save as well…”

CFO: “Here’s our estimate of avoidable expenses we could achieve …”
  • $250,000 approximate savings by avoiding automatic renewal of contracts without re-negotiation, and in some cases, contracts we don’t even want to continue (e.g. maintenance agreements) 
  • $50,000 approximate savings from reduced manpower required to handle contracts (e.g. manual authoring, filing, creating time-based payments, monitoring for review, etc.)
That’s another $300,000 savings a year from better, more efficient management of contracts within Procurement.

CEO: “So let’s recap what you’ve told me…”

CPO & CFO: “Here’s the summary:”
  • $2.3M through increased on-contract buying and better compliance with contract terms 
  • $300,000 through avoidance of unwanted automatic contract renewals and elimination of non value-added manual contract administrative manpower – 1 FTE. 
That’s a total of about $2.6M a year.

CEO: “That’s savings that would go directly to our bottom line. I like that idea, but why can’t we get more people using our negotiated contracts today? And why can’t we keep better track of them today?”

Employees say:
  • “Who knows what suppliers we have discounts with – I can’t keep up with memos and e-mails saying I should by from this supplier or that.” 
  • “I don’t have time to look up the details of supplier contracts when I need something fast – I usually just put in the list price and assume the supplier will discount it properly.” 
  • “It’s a shame that maintenance agreement got extended – we don’t even use that equipment anymore.” 
Procurement people say:
  • “Contracts are filed all around the company – no one really knows what all contracts we have. 
  • “Many contracts are still only on paper and not at all visible in our e-procurement system.” 
  • “There is no standard for what information we have across contracts, or how we categorise them – it’s impossible to do any kind of automated analysis.” 
  • “We try to keep up with contract expiration dates, periodic payments, purchase activity compliance, and all those things; but even though we spend a lot of time trying, we still miss a lot of things.” 
CEO: “That’s all more complicated than I realised. What capabilities would we need to get the savings you outlined?”

The CPO and CFO combine their respective notes to make a list on the whiteboard:
  • A single, centralised electronic contract repository where all contracts are stored 
  • Standard information templates for each type of agreement (e.g. simple, framework, call-off, blanket, price lists, etc.) 
  • Integration of contracts directly into e-procurement for buyer visibility, automatic terms compliance, and capture of purchase activity 
  • Automated monitoring of scheduled events and expiration dates with e-mail alerts to the appropriate people 
  • Automatic generation of scheduled payments for authorisation 
  • Performance analysis reports and KPIs 
CPO: “There are other benefits we could achieve with automated contract management as well…”

In addition to the $2.6M annual savings and cost avoidance we can clearly identify today:
  • A consolidated view of our commitments and liabilities 
  • Reduced risk of lapses in contract coverage (e.g. insurance or warranties) 
  • Better information for spend analysis 
  • More time available to procurement professionals to negotiate more contracts that generate more savings
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